Is the FED to buy Bonds?

Today we will probably get to see if Bernanke and Co. expand existing lending programs or initiate fresh quantitative measures like buying Treasuries. Helicopter Ben did a good job last week promoting what powers the Fed has at its disposal and injected, albeit, temporary ‘optimism’ into an otherwise ‘pessimistic’ environment. He continues to hang his hat on the ‘political will’ required. Do not expect anything out of the ordinary in today’s communiqué. The Fed will re-iterate that they stand ‘ready to do what it can and what it must do, to promote non-inflationary growth in the US economy’.

The US$ is mixed in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies, in a ‘subdued’ trading range so far.

US data surprised the market yesterday and brought forth a glimmer of hope, temporarily at least. Housing starts defied all expectations and unexpectedly advanced, halting the longest losing streak in nearly 2-decades in Feb. Initial response by the market has been relief, some believing that the pace of the economy’s decline may be easing. Remember, one set of data does not make a trend. Housing starts rose to +583k units vs. +483k, still a record low but the first gain in 7-months. The bulk of the +22.2% gain m/m was due to the +82.3% gain in condo starts. However analysts remain weary about the headlines, even though the data will add to GDP, the multi-family market remains volatile with permits showing a -10.8% m/m decline (+6.6% rise in Jan.), which could suggest that the condo figure is inflated somewhat. Digging deeper, sales figures continue to remain woeful with inventories close to record highs in both the new and existing market. Inventories have been the curse to builders; they need to be reduced before they can start adding to it. In theory, this factor will continue to pressurize prices. On the flip side, US PPI advanced less than expected. The +8.7% gain in gas prices helped support the headline last month (+0.1% vs. +0.8% m/m), but eased on a y/y basis with falling food prices cooling gains. However, ex-food and energy revealed that producer prices rose more than expected (up +0.2% m/m or +4.0%, y/y), mostly on a gain in tobacco goods and light motor vehicle prices which tend to be rather volatile.

The US$ currently is higher against the EUR -0.02%, GBP -0.48%, JPY -0.01 and lower against CHF +0.05%. The commodity currencies are little changed this morning, CAD -0.05% and AUD -0.27%. Canadian economic data continues to take it on the chin. However, yesterday’s manufacturing shipments fell less than expected for Jan. but, still marked the 3rd-largest monthly decline on record (-5.4% vs. -8.2%). Digging deeper, volumes accounted for almost all of the weakness (which does not bode well for last Q’s real-GDP report). It’s worth noting that shipments fell to the lowest level in a decade, as motor vehicle plummeted -38.1%, m/m, on the back of weaker production, all other sub-sectors saw a decline in shipments as well. Analysts expect the BOC’s governor Carney to revise the banks economic outlook targets and perhaps adopt some extraordinary monetary policies to boost economic demand. Even with some commodities easing, do not be surprised to see USD sellers on rallies as negative sentiment wanes and a degree of global optimism prevails. On aggressive pull backs look for speculators to implement another short CAD position as the overall general malaise of the markets warrants it.

Despite Asian equities gaining traction on the back of ‘certain’ banks expecting a healthier year and convincing investors to add riskier assets to their portfolios, the AUD$ has retreated from its 2-month highs. Investors remain concerned that the countries deteriorating economy may convince the RBA to lower interest rates to new record lows (0.6600).

Crude is lower in the O/N session ($48.88 down -28c). Crude prices remain resilient, yesterday with US housing starts surprising the market to the upside, the ‘black stuff’ advanced on optimism that the US economy may be seeing the light at the end of the tunnel. Speculators seem to have faith with Bernankes assessment that their economy may turn around at the end of this year or at the beginning of next. A couple of other factors also gave crude prices a lift, yesterday was April’s option expiry day (strong interest in $50 calls) and secondly, Algerian Oil Minister Khelil, said that OPEC may still ‘take strong’ measures to protect revenue should prices keep falling. However, this morning’s EIA report is expected to convey another rise in weekly inventories which could impede this latest rally, temporarily at least. Last weekend OPEC prudently refrained from cutting output any further on concerns that higher energy prices in this economic climate could worsen this global recession. In fact they probably are deferring production cuts until May whilst they implement fully the last suggested quotas back in Dec. They need to trim another -800k barrels a day to comply with the lower quotas already decided on. OPEC is a difficult organization to implement consensus so it seems. Up to now, the commodity had only one supporter and that’s OPEC (they pump 40% of the world’s oil). Last week saw both the IEA and OPEC cut their 2009 forecasts for oil demand for a 7th month and reduced supply estimates as the global economic slump saps consumption as well as investment in new fields. The former agency reduced its forecast to +84.4m barrels a day (decline of -1.25m y/y). OPEC’s estimates dropped to +84.6m barrels, a reduction of -1.01m barrels. Since Sept. they have cut production 3-times to slow the slump in prices and prevent a glut on world markets. Gold remains under pressure as global equities reduce the demand for the ‘yellow’ metal as an alternative investment ($910). Look for better buying interest on deeper pull backs.

The Nikkei closed 7,972 up +23. The DAX index in Europe was at 4,043 up +56; the FTSE (UK) currently is 3,873 up +16. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 5bp yesterday (2.99%) and are little changed in the O/N session. Treasuries remain better bid on pull backs despite giving up ground because of a positive equity market ahead of the Fed meeting which concludes this afternoon. Investors are speculating that US policy makers will provide more guidance on purchase of Treasuries similar to that of the BOE in their communiqué at 2.15pm.

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